Tax court rules on St. Luke’s dues

MANILA, Philippines - Attempts by the Bureau of Internal Revenue (BIR) to tax St. Luke’s Medical Center were partly frustrated by the tax court last month, with BIR officials failing to prove that the upscale hospital in Quezon City was no longer a non-profit. Settling a five-year-old tax dispute, the Court of Tax Appeals ruled that while St. Luke’s has been earning huge profits, it remains a non-stock and non-profit corporation, and also operates for "charitable and social welfare" purposes. But the court rejected the hospital’s claim of being entirely tax exempt, stating in a 29-page decision issued last November 21 that non-operating activities such as interest earnings and foreign exchange gains are subject to the corporate income tax. The BIR wanted to collect P218 million, citing the Tax Code which imposes a 10% income tax on non-profit schools and hospitals. The court reduced the amount to only P43 million. The dispute arose in 2003 when the BIR told St. Luke’s that the hospital owed P218 million, including surcharges and interest, covering profits for 2000 (P369 million), 2001 (P519 million), and 2002 (P557 million). Citing Section 27 of the Tax Code, the BIR argued that all of St. Luke’s profits were subject to the 10% tax, as the provision states that profits from unrelated or business activities should account for no more than half the total to get a tax exemption. St. Luke’s, however, cited Section 30, which states that non-stock and charitable entities are entirely tax-exempt as long as officials do not benefit from assets or profits. BIR lawyers claimed that only 13% of the hospital’s operations in 1998 were devoted to charitable activities. The hospital, founded by Episcopalian missionaries in 1903 in Tondo, now has 650 beds and 1,700 doctors, and performs 4,300 procedures daily at its Cathedral Heights complex in Quezon City. It also runs a medical school. The decision, by Associate Justice Olga Palanca-Enriquez, sided with St. Luke’s and stated that Section 30 applied to the case. Section 27 covers only non-profit schools and hospitals while Section 30 covers non-stock corporations that are at the same time charities. In court, St. Luke’s officials submitted documents to show that no shares of stock had been distributed and that members of the hospital’s board of trustees were all volunteers, with no salaries or allowances. St. Luke’s also showed a certificate from the Social Welfare department recognizing it as a charitable institution, and explained that its Medical Social Department gives free medical services to "underprivileged individuals." The tax court also cited a 1965 Supreme Court decision that stated St. Luke’s remained a charitable institution even patients paid fees, as long as funds were "devoted exclusively to the maintenance of the institution." But the hospital’s "non-operating and other income" must be taxed 32%, the prevailing corporate tax rate for the years 2000 to 2002, when St. Luke’s reported more than P93 million in profits from interest earnings, foreign exchange gains, and others. Including penalties such as a 25% surcharge and interest of 20%, St. Luke’s tax liabilities amount to P43 million, the court said. James H. Roldan, BIR assistant commissioner for legal services declined to comment extensively. He said, however, that the BIR would question the ruling. "This will be elevated to the [Court of Tax Appeals] en banc. As a policy, we [will] exercise that," he said. St. Luke’s officials were not immediately available for comment. — I. P. Pedrasa, BusinessWorld